Efficiently structured insurance-linked securities (ILS) transactions are playing a pivotal role in reducing capital costs for re/insurers, according to risk capital and reinsurance solutions broking firm Augment Risk.
“Moreover, ILS can often deliver capital at a lower cost compared with traditional reinsurers,” Augment Risk said.
“The cost of capital is typically represented by a return on equity, which can range from mid to high teens. By structuring deals efficiently, ILS transactions can potentially lower the cost of capital from between 5% and 7%. Even a modest reduction in capital costs can lead to significant improvements in the insurer’s financial performance over time,” the firm continued.
Additionally, Augment Risk, which utilises Bayesian modelling techniques to design diversified and client-aligned ILS structures, emphasizes that the stability and flexibility of institutional capital make it particularly appealing.
Unlike the often cyclical and performance-sensitive nature of traditional reinsurance markets, institutional investors, such as pension funds, sovereign wealth funds, and private credit vehicles, offer a more predictable and long-term source of capital.
The broker also notes that from an investor’s perspective, ILS offers a unique combination of low correlation, stable returns, and duration matching, ultimately making it an attractive option in an otherwise volatile and crowded investment landscape.
“ILS deals typically have durations ranging from three to seven years, which suits the investment horizons of many institutional investors. Additionally, the structured nature of these deals often results in higher returns with reduced volatility, making them an attractive addition to any investment portfolio,” Augment Risk said.
“The value proposition of ILS lies in its ability to provide an asset with low correlation to other holdings, a favourable risk profile, and durations that align with their investment goals. Many investors are eager to apply their investment strategies to manage reinsurance trust assets and deliver a return that is higher than the risk-free rate. These characteristics make ILS a reliable and sustainable source of returns in an increasingly complex and volatile financial landscape,” the firm continued.
Looking ahead, the broker states that the ILS market serves as a “reliable capital provider” for insurers by offering stable and lower-cost capital, while the insurance market provides a diversified and attractive return opportunity for investors.
“The bespoke nature of ILS transactions ensures that both insurers and investors can find tailored solutions to meet their needs, fostering growth and stability in the insurance industry,” the firm added.
“As the ILS market continues to evolve, its role in supporting sustainable capital allocation and investment returns is likely to become even more prominent,” Augment Risk concludes.
